Forecasting the NOK/USD Exchange Rate with Machine Learning Techniques

17 Pages Posted: 31 Jan 2014

See all articles by Theophilos Papadimitriou

Theophilos Papadimitriou

Department of Economics, Democritus University of Thrace

Periklis Gogas

Democritus University of Thrace - Department of Economics

Vasilios Plakandaras

Democritus University of Thrace

Date Written: January 29, 2014

Abstract

In this paper, we approximate the empirical findings of Papadamou and Markopoulos (2012) on the NOK/USD exchange rate under a Machine Learning (ML) framework. By applying Support Vector Regression (SVR) on a general monetary exchange rate model and a Dynamic Evolving Neuro-Fuzzy Inference System (DENFIS) to extract model structure, we test for the validity of popular monetary exchange rate models. We reach to mixed results since the coefficient sign of interest rate differential is in favor only with the model proposed by Bilson (1978), while the inflation rate differential coefficient sign is approximated by the model of Frankel (1979). By adopting various inflation expectation estimates, our SVR model fits actual data with a small Mean Absolute Percentage Error when an autoregressive approach excluding energy prices is adopted for inflation expectation. Overall, our empirical findings conclude that for a small open petroleum producing country such as Norway, fundamentals possess significant forecasting ability when used in exchange rate forecasting.

Keywords: International Financial Markets, Foreign Exchange, Support Vector Regression, Monetary Exchange Rate Models

JEL Classification: G15, F30, F31

Suggested Citation

Papadimitriou, Theophilos and Gogas, Periklis and Plakandaras, Vasilios, Forecasting the NOK/USD Exchange Rate with Machine Learning Techniques (January 29, 2014). Available at SSRN: https://ssrn.com/abstract=2387710 or http://dx.doi.org/10.2139/ssrn.2387710

Theophilos Papadimitriou

Department of Economics, Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

HOME PAGE: http://econ.duth.gr/author/papadimi/

Periklis Gogas

Democritus University of Thrace - Department of Economics ( email )

Komotini, 69100
Greece

HOME PAGE: http://www.econ.duth.gr/personel/dep/gkogkas/index.en.shtml

Vasilios Plakandaras (Contact Author)

Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

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